Saturday, December 6, 2014

Why Rowan, an Offshore Driller, Should Be Able to Weather Falling Oil Prices

NEW YORK (TheStreet) -- Rowan Cos. (RDC) is in a better position than most of its rivals in the offshore drilling market, thanks to the high quality of its modern rig fleet.

The market has been going through a rough patch because of overcapacity that caused double-digit drops in daily rental rates for floaters -- rigs that are used for drilling in deep waters -- and for jack-ups -- rigs that usually work on depths of less than 600 feet.

In September, industry executives, including senior officers of some of the leading offshore drillers such as Seadrill(SDRL) and Transocean(RIG) , predicted even tougher conditions for 2015. Then, oil futures dropped in October, exacerbating an already tough situation for oilfield-service companies.

Falling oil prices could also hit Rowan, which owns four floaters, the ultra-deep-water drillships, and 30 jack-ups. The company's shares have dropped 33% year-to-date through Thursday's close. They were trading at $23.94, up 18 cents, on Friday morning.

During the company's third-quarter earnings conference call last week, CEO Thomas Burke said utilization and rental rates for the company's rigs have been "under pressure" because of excess capacity, adding that he's "quite cautious" about a rebound in the jack-ups and floater market in the near term.

Still, Houston-based Rowan is confident about its ability to weather the slump. The driller has forecast an increase in revenue for 2015, and Goldman Sachs analyst Waqar Syed wrote in Nov. 6 report that Rowan "is among a select group of companies who could grow EPS [earnings per share] in 2015."

Rowan's biggest strength is its modern rig fleet. About 65% of the company's offshore drilling units are 14 years old or newer. Further, the company has 19 high-specification jack-up rigs that can drill deeper wells more efficiently than conventional jack-ups can. Rowan's four drillships are also high-specification, which means that they are capable of drilling in significantly greater water depths than other drillships.

That is in contrast to some of Rowan's competitors, such as Diamond Offshore(DO)whose fleet consists of a majority of rigs that were built before the 2000s, including a dozen rigs that are more than 40 years old.

With a newer and high-specification fleet, Rowan can charge more. Rental rates for its rigs were about 20% higher than conventional floaters and jack-ups, according to latest data compiled by the company.

Goldman's Syed said that four of Rowan's new rigs in particular will play a crucial role in driving earnings growth next year, and Rowan projects that those rigs will boost its cash flow starting in the second half of next year.

Two of those rigs have recently started working while the remaining will be deployed before the third quarter of 2015. The contracts for these drillships go into 2017. insulating them from the weakening market conditions.

The higher cash flow, coupled with a "significantly decline" in capital spending following the delivery of its fourth drillship in 2015, according to Rowan's projections, will allow the company to reward shareholders with stock buybacks and higher dividends.

Rowan's jack-up rigs, however, will face what could be an even tougher market, because the contracts for a majority of those rigs will expire by 2015. The company will have to find new buyers or renew the contracts next year, when utilization and day rates could be lower.

FBR Capital Markets analyst Thomas Curran, however, is optimistic. In a Nov. 5 report, Curran wrote that Rowan will generate 93% of its jack-ups related earnings from its high-specification units and the market for these kinds of rigs will likely hold up better than other classes do.

Goldman Sachs rates Rowan's stock at neutral, while FBR Capital rates it at outperform, which the equivalent to a buy rating.

Rowan spokeswoman Suzanne Spera was not available for comment.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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